A Better Solution for Reducing Inflation

Published September 14, 2022

The Federal Reserve could attempt to fix inflation by replaying what it did in the 1980s, which resulted in two bruising recessions. But as Cochrane points out, raising interest rates will also raise interest costs on the federal government’s debt. The solution, Cochrane explains, is to fix the structural problems in the United States by coordinating monetary and fiscal policy, deregulating the economy, and simplifying tax laws.

Discussion Questions:

1. Why does the interest rate affect inflation?
2. How does the fiscal theory of inflation differ from the monetary theory?

Additional Resources:

• Read “Fiscal Histories,” by John Cochrane. Available here.
• Listen to “What ‘Is’ Is: John Cochrane on Recessions, Inflation, the Fed, Debt and ‘Green Pork,’” with Bill Whalen and John Cochrane. Available here.
• Read “Inflation and Monetary Policy,” via Policy Insights by PolicyEd. Available here.